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When the global financial storm began to gather a year ago, China appeared to be a nation that was well supplied with raincoats. The economy was growing at double-digit rates, Chinese banks had little overseas exposure to the credit crisis, and the country's $1.9 trillion in hard-currency reserves stood as a vast emergency fund that could be drawn upon in the event of trouble. Just two months ago, while giant Wall Street and European banks were crumbling, China was relishing its role as host of the Olympic Games as the world paid tribute to its years of remarkable, seemingly unstoppable economic progress.

The raincoats, it turns out, have holes in them. With the chances for a global recession increasing, it's becoming clear that not even the world's fastest-growing major economy can avoid a pronounced slowdown. Any remaining hopes to the contrary were dashed recently when China's National Bureau of Statistics released the country's latest economic data: in the third quarter, GDP growth had slipped to 9%, the slowest quarterly pace since 2003. Meanwhile, estimates for 2009 growth are being slashed to as low as 8%, which would be a dramatic deceleration from last year's 12% rate and would rank as China's worst results since 1999.

It's pretty clear why China is hitting the skids. The country's economic transformation over the past 25 years has led a great wave of globalization during which the mainland's once small and isolated economy became much bigger and deeply integrated into global commerce  making it more exposed to the business cycles of its big trading partners like the U.S. "The huge elephant in the China shop is the slowing global economy," says Merrill Lynch Asia economist T.J. Bond, who cites an obvious reason: China's manufacturing sector, which accounts for 43% of China's GDP, depends heavily upon sales to the West. Some 40% of China's exports go to the U.S. and Europe, and with potentially deep recessions setting in there, economists are slashing the country's trade projections. Bond estimates that China's export growth rate will fall to 10% in 2009 from 21% this year. For the revved-up mainland, that's a frightening plunge.

A slump in exports has pretty grim implications for the country's manufacturing boomtowns, and the pain is already being felt. Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, estimates that export orders at some 70,000 factories owned by Hong Kong companies in southern China have declined 5%-10% this year compared with 2007. Recent months have seen a first wave of bankruptcies and closures among the tens of thousands of factories in industrial zones from Guangzhou to Shanghai that make toys, jeans and PCs bound for U.S. retailers.

Chinese manufacturers are particularly vulnerable to a recession right now because of higher labor and commodities costs and because of the simple fact that China's boom resulted in the creation of far more factories than global demand could possibly support in a cyclical downturn. A shakeout is unavoidable, and it is being made worse by the worldwide credit crunch. Nervous banks, Lau says, have reduced the credit lines of many small manufacturers by up to 50%, starving them of operating funds. Letters of credit, which facilitate the shipment of exports, were once automatically accepted by banks in Hong Kong, but now they are being held until bankers are sure funds are coming from overseas, so payments to manufacturers for their products are being delayed. As a result, Lau says he expects that 20% of China's Hong Kongowned factories, which employ 10 million people, could be shut down by early next year. That's a big concern to government officials, who will be hard-pressed to cope with a growing army of newly unemployed migrant workers. When Hong Kong toymaker Smart Union abruptly closed its doors in mid-October, hundreds of angry ex-employees crowded outside its shuttered factory in Guangdong province demanding unpaid wages. Says Lau: "I worry that the situation can't be improved."

With global growth expected to slow further in coming months, the pressures facing manufacturers certainly will increase. Some Chinese companies are giving up their export businesses entirely. Shi Junmin, CEO of Pinghu Mingda Bag and Suitcases Co. in Zhejiang province near Shanghai, had been selling suitcases to U.S. customers since 2006. He stopped in June. Orders were still flowing in from America, but clients, strained by the financial crisis, were not paying him, Shi says. By midyear, he says, he was owed some $3 million. Shi instead shifted to manufacturing luggage for local China brands, hoping domestic sales could rescue his company. "We just ran out of money to buy materials to manufacture our own," Shi complains. "Processing for domestic factories is our only option."

Counting on Chinese consumers, however, may not be a sure bet. Some economists had thought that increasingly wealthy Chinese, with their appetite for cars, mobile phones and Big Macs, could help fill the breach opened by retreating American spenders. But that hope, too, is fading. Though Chinese spending is so far holding up  retail sales of consumer goods jumped 23% in September  household consumption, at only 40% of GDP (compared with about 65% in industrialized countries), isn't yet substantial enough to maintain China's high growth rates. "I don't think [domestic spending] will replace what has been lost in exports," says UBS economist Wang Tao. Nor will it offset another weakening pillar of China's economy: real estate. Rampant construction of new office towers and apartment blocks in recent years was a huge boon to growth. But government action to cool down the market, by, for example, restricting credit for property development, is resulting in a sharp falloff in construction. After 35% growth in real estate investment in the first half of the year, Wang estimates that growth dropped sharply to some 20% in July and August. The property sector accounts for about a quarter of all fixed-asset investment in China and about 10% of national employment. A slump could drag down other sectors like steel production. "Beijing cannot afford a collapse in the housing market," wrote Jing Ulrich, chairman of China equities for JPMorgan, in a recent note to investors.

The Chinese government has quickly awakened to the threat of a sharp slowdown. Until a few months ago, Beijing's top priority had been fighting inflation. Now policymakers are easing off the brakes and hitting the gas again in an effort to stimulate growth. The central bank lowered its benchmark interest rate twice in the past 45 days, the first cuts since 2002. In mid-October, the State Council announced plans to increase infrastructure spending, to offer tax rebates for exporters and to boost government-controlled prices for agricultural products. Beijing is also widely expected to introduce measures to resuscitate the faltering property market, in an attempt to prevent a U.S.-style crash in home prices. The government announced on Oct. 22 that it would waive taxes on certain property deals to spur flagging sales.

Government action could shield the Chinese economy from the worst of a global slump. Indeed, economists currently say China ought to remain a relatively bright spot amid the economic gloom. Merrill Lynch estimates that China will account for 40% of world GDP growth in 2009. Continued strong Chinese demand for raw materials, machinery and consumer goods is expected to prop up other Asian economies  the region as a whole is projected to dodge a recession next year.

But even when growing at a double-digit rate, China's economy is not yet large enough by itself to keep the global economy surging. The country accounts for only about 5% of total world GDP; the U.S. is responsible for 28%. "China's strength can help," says UBS's Wang, "but it's not enough to save the world." China may be lucky just to save itself.